#1
What is portfolio diversification?
Spreading investments across different assets
ExplanationMinimizing risk through asset allocation.
#2
What is the purpose of using correlation in portfolio management?
To measure the relationship between asset returns
ExplanationUnderstanding asset performance interdependence.
#3
What is the primary goal of portfolio diversification?
To minimize risk
ExplanationRisk mitigation strategy.
#4
What is the purpose of asset allocation in portfolio management?
To determine the appropriate mix of asset classes
ExplanationOptimizing asset class distribution.
#5
What is the relationship between correlation and diversification?
High correlation decreases diversification benefits.
ExplanationImpact of correlation on portfolio risk.
#6
Which of the following best describes systematic risk?
Risk that affects the entire market
ExplanationMarket-wide risk affecting all investments.
#7
What is the formula for calculating portfolio variance?
Sum of weighted covariances between assets
ExplanationAssessing risk through asset correlations.
#8
What is the primary benefit of including uncorrelated assets in a portfolio?
Decreases portfolio risk
ExplanationReducing overall portfolio volatility.
#9
What does beta measure in the context of portfolio risk?
The volatility of a stock relative to the market
ExplanationAssessing individual asset risk.
#10
Which of the following is NOT a common risk management technique used in portfolio management?
Dollar-cost averaging
ExplanationAveraging investment costs over time.
#11
What does the concept of efficient frontier represent in portfolio theory?
The trade-off between risk and return
ExplanationOptimal risk-return balance.
#12
What is the Sharpe ratio used for in portfolio analysis?
To assess the risk-adjusted return of a portfolio
ExplanationEvaluating portfolio performance relative to risk.
#13
What does the term 'diversifiable risk' refer to?
Risk that is specific to an individual asset and can be reduced through diversification
ExplanationMitigating risk through portfolio expansion.
#14
In the context of portfolio risk, what does 'idiosyncratic risk' refer to?
Risk that is specific to an individual asset and can be reduced through diversification
ExplanationAsset-specific risk.
#15
What does the efficient frontier represent in portfolio theory?
The optimal trade-off between risk and return
ExplanationMaximizing returns while minimizing risk.